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The Corruption of Democracy in Venezuela

By
Gustavo Coronel

This article appeared in the March 2008 issue of USA Today
Magazine.

Hugo Chavez was elected president of Venezuela in December 1998
on the strength of three main promises: convening a Constituent
Assembly to write a new constitution and improve the state,
fighting poverty and social exclusion, and eliminating corruption.
Nine years later, it has become evident that the Constituent
Assembly primarily was a vehicle to destroy all existing political
institutions and replace them with a bureaucracy beholden to his
wishes. Poverty and social exclusion remain as prominent as before,
while the levels of government corruption are higher than ever.

Today, the nation is locked in an intense struggle between the
defenders of democracy and a president intent on becoming a
dictator for life. Chavez’s latest attempt to push a constitutional
reform that would have allowed him unlimited opportunities for
reelection was defeated by a margin that official figures put at
two points, but independent analysts place at five to 10 points. In
negotiating the narrower margin with a National Electoral Council
largely under his control, Chavez managed to appear magnanimous in
defeat, but he is not a democrat, and he will keep trying to become
president for life in any way he can.

Venezuela has been characterized by the persistent presence of
political and financial corruption in public administration. In
1813 and, later, in 1824, national hero Simon Bolivar felt it
necessary to issue decrees defining corruption as “the violation of
the public interest.” He established the death penalty for “all
public officers guilty of stealing 10 pesos or more,” including
“those judges who disobey these decrees.” In 1875, the finance
minister at that time confessed, “Venezuela does not know to whom
it owes money and how much. Our books are 20 years behind.” One
hundred years later, the General Comptroller under Pres. Luis
Herrera would describe the state of the country’s finances in
almost identical terms, as “a system totally out of control.”

In the early 20th century, the long dictatorship of Juan Vicente
Gomez was plagued by high corruption, but it was limited to the
dictator’s immediate collaborators. A similar situation prevailed
during the military dictatorship of Marcos Perez Jimenez, from
1948-58. This situation of administrative disarray was replaced
during the 1960s by a period of high transparency in the management
of public wealth at the hands of democratic presidents Rómulo
Betancourt, Raúl Leoni and Rafael Caldera. During these years,
Venezuelan democracy became the political model to be imitated in
Latin America, comparing favorably with the dictatorships of the
left and right that prevailed in those years, and becoming a haven
for thousands of Latin American political exiles looking for
freedom.

In the mid 1970s, the management of national assets deteriorated
significantly, as the country experienced a sudden oil windfall
that tripled fiscal income. The ordinary men in charge of the
government were exposed to extraordinary temptations. Faced with
such riches, Pres. Carlos Perez established a program called “The
Great Venezuela,” a tropical version of Mao Tse-Tung’s “Great Leap
Forward” in China that ended in financial and social disaster. The
government poured close to $2,000,000,000 into industrial projects
designed to convert southern Venezuela into another Ruhr. At one
point, the country was home to more than 300 state-owned companies,
none of which was profitable. As a result of the significant
government expenditure and insufficient enforcement of regulations,
corruption spun out of control. Up until then, graft had been
restricted to the ruling elites, but now many Venezuelans started
to participate in the abuse and misuse of public funds. By 1980,
the country had fallen into debt to the international banks, victim
of the so-called “Dutch disease” that affects Third World
petrostates that depend almost solely on hydrocarbon exports for
national income.

From 1980 onwards, Venezuelan corruption has remained high.
Particularly grave was the administration of Pres. Jaime Lusinchi
from 1984-94, which saw some $36,000,000,000 pilfered or stolen
mainly through a corrupt exchange control program, according to an
estimate by Venezuelan sociologist Ruth Capriles at the Caracas
Andres Bello Catholic University. Soaring corruption during the
Lusinchi period resulted from several factors, including weak
political institutions, lack of administrative controls, too much
money circulating in the financial system of the government, and,
above all, populist leaders promoting a welfare state in which hard
work and social discipline were not encouraged. In 1997, the
Caracasbased nongovernment organization Pro Calidad de Vida
estimated that some $100,000,000,000 in oil income had been wasted
or stolen during the last 25 years.

As the 20th century came to an end, Venezuela was ripe for
significant political change. The main contenders in the 1998
presidential election-paratrooper Hugo Chavez and former Governor
of the State of Carabobo, Henrique Salas-promised radical political
change. Venezuelans perceived Chavez as someone who looked and
spoke like them and could, therefore, represent them better. His
electoral promises were crucial in winning the votes of the
majority.

In his inaugural speech, in January 1999, Chavez called for a
“political revolution” before tackling social or economic issues.
Taking advantage of the popular euphoria following his victory-and
in violation of the existing constitution-he convoked a Constituent
Assembly possessing absolute power to write a new constitution and
to “redefine the state.” This Assembly, made up of his followers,
went on to dissolve the democratically elected Congress and dismiss
all the members of the Supreme Court, as well as the Attorney
General, the General Comptroller, and most of the judges in the
country, only to replace them with bureaucrats loyal to the
president. In a letter to the Supreme Court, Chavez stated that
“the president had exclusive authority on the management of state
affairs,” thus appearing to place himself above the law.

In November 1999, the new Minister of Foreign Affairs, Jose
Vicente Rangel, gave a speech in which he put forward the position
of the government regarding corruption. He said that, from then on,
public office would follow ethical norms, that corruption had
already cost Venezuela too much in economic, social, and spiritual
terms, and that the new judicial system and the new Civic Power,
incorporated in the new constitution, would combine to combat
corruption. That is not what has occurred, however.

In the nine years since Chavez came to power, an estimated
$300,000,000,000 of oil income has entered the national treasury.
The exact number is uncertain due to the poor transparency of the
government accounts, and because the national petroleum company no
longer presents financial results to the U.S. Securities Exchange
Commission or to the Venezuelan people. In parallel, during
Chavez’s tenure, national debt has increased from $22,000,000,000
to about $70,000,000,000. Together with income tax revenues, the
total income of Venezuela during Chavez’s presidency has been
approximately $700,000,000,000. This formidable amount of money is
nowhere to be seen in terms of public works or effective health and
education programs.

Three parallel budgets existed-totaling more than
$80,000,000,000-in 2007: the formal one, for some $55,000,000,000
(including additional amounts), approved without discussion by the
submissive National Assembly; a second one, amounting to
$10,000,000,000, derived from the international monetary reserves
taken from the Venezuelan Central Bank, in violation of the laws of
the country; and a third, in the amount of $15,000,000,000, built
from the funds siphoned out of Petroleos de Venezuela, monies which
were required for investment and maintenance of the petroleum
industry. None of these budgets are discussed publicly or subject
to accountability.

Irregularities abound in the management of public funds: more
than $22,500,000,000 in dollar transfers have been made to foreign
accounts, maintains the Venezuelan Central Bank, and at least half
of that money remains unaccounted for. Jose Guerra, a former
Central Bank executive, indicates that some of this money has been
used by Chavez “to buy political loyalties in the region … and
some has been donated to Cuba and Bolivia, among other
countries.”

According to a Jan. 31, 2006, story in the Financial
Times, a select group of Venezuelan bankers, including those
at Banco Occidental de Descuento and Fondo Comun, has profited from
the acquisition of Argentinean bonds by the Venezuelan government,
at the expense of the national treasury. The bonds are bought at
the official rate of exchange and sold at black market rates, at
considerable profit. Venezuelan journalist Carlos Ball estimates
that bankers loyal to the government could have profited by up to
$600,000,000 as a result of the differential between the official
and the black market rates. Former Chavez Minister of Finance Jose
Rojas has predicted that “the loss of autonomy of the Venezuelan
Central Bank and the disorder in the management of the financial
resources on the part of the government will lead to a significant
financial crisis.”

The nine years of Chavez’s presidency have led to the highest
levels of government corruption ever experienced in Venezuela. The
main reasons have been: the record oil income obtained by the
nation, money going directly into Chavez’s pockets; a mediocre
management team working without transparency or accountability; the
ideological predilections of Chavez, which have led him to try to
play a messianic role in Latin America, and even world affairs; and
the policies of handouts put in place by Chavez to keep the
Venezuelan masses politically loyal.

Corruption, Inc.

Three major areas of corruption have emerged during the Chavez
presidency: grand corruption, derived from major policy decisions
made by Pres. Chavez; bureaucratic corruption, at the level of the
government bureaucracy; and systemic corruption, taking place at
the interface between the government and the private sector.

Examples of grand corruption include:

The acceptance by Chavez of foreign contributions for
his presidential campaign and even after his election. In
1998 and 1999, the Spanish bank BBVA (Banco Bilbao Vizcaya
Argentaria) allegedly contributed substantial amounts of money to
Chavez’s presidential campaign and, later, after he already had
been inaugurated as president. The former president of the bank,
Emilio Ibarra, admitted authorizing two deposits, one for $525,000
in 1998 and another for $1,000,000 in 1999, to finance Chavez’s
political activities. In 2006, the government of Spain tried Ibarra
for these and other irregularities.

Expenditures and promises made to political leaders and
countries of the Western Hemisphere, in order to buy their
political loyalties. The Chavez government has disbursed
or promised an estimated $70,000,000,000 to foreign leaders and
their countries. These expenditures include some $2,000,000,000 per
year in oil subsidies to Cuba; about $4,000,000,000 in the
acquisition of Argentinean commercial papers; an estimated
$300,000,000 in cash donations to Evo Morales in Bolivia; the
promise of building up to $20,000,000,000 worth of refineries in
Jamaica, Paraguay, Nicaragua, Brazil, Ecuador, and nine other
countries and a $25,000,000,000 gas duct from Venezuela to
Argentina; and acquisitions of about $6,000,000,000 worth of
sophisticated weaponry from Russia, China, Belarus, and other
countries. Many of the promises never will be fulfilled, but the
fact remains that these expenditures and promises have been made
directly by Chavez, without consulting the people of Venezuela or
following normal administrative procedures.

Social programs run by the military in 2000-02.
Soon after becoming president, Chavez established programs called
Bolivar 2000 and Central Social Fund run by the armed forces and
designed to do social work. Journalist Agustin Beroes reports,
however, that the execution of this program left much to be
desired. It became a vehicle for the personal benefit of its
managers-officers such as Victor Cruz Weffer and William Farinas.
Some $700,000,000 was put into these programs and, at least half of
it remains unaccounted for. The Central Social Fund, for instance,
gave a $500,000 grant to an organization run by the wife of Horacio
Perez, Commander Farina’s personal driver.

Acquisition of the $65,000,000 presidential
airplane. After visiting the Middle East and traveling in
an Airbus owned by the royal family of Qatar, Chavez decided he
wanted one just like it. In violation of article 314 of the
Venezuelan constitution and the laws regulating government
expenditures, he bought an A319-133X without budgetary
provisions to acquire it and after saying in numerous public
speeches that he would get rid of all government aircraft because
there already were too many of them.

Corruption at the State of Barinas Sugar Mill.
This Chavez pet project is run by the military and Cuban advisors.
A group of about 17 officers and their advisors have been charged
with pilfering or pocketing some $1,300,000 from the accounts of
this project. Worse, the 62nd Army Engineers Unit has been charged
with squandering $1,500,000,000 of the $2,600,000,000 appropriated
for the project. The Minister of Agriculture admitted to
malfeasance for not revealing these facts when he became aware of
them. His explanation? “We were in the midst of parliamentary
elections and did not want to create a scandal damaging to our
government.”

Bureaucratic corruption has the government involved in bribery,
extortion, stealing of public funds, abuse of political power,
nepotism, and other varieties of illegal or unethical use of public
assets. Examples include:

Government contracting is done mostly without
bidding. Although the law stipulates that all government
contracting should follow bidding procedures, except in cases of
national emergency properly defined as such, the Venezuelan chapter
of Transparency International estimates that 95% of all known
public contracts during the last decade have been awarded without
bidding. This is a major source of personal enrichment for corrupt
government officers. An example of this is what has taken place in
the State of Carabobo, where Gov. Acosta Carlez publicly has stated
that he has given some 800 no-bid contracts involving tens of
millions of dollars. His argument? “We are always in an emergency
here.”

Corruption at the Supreme Tribunal of Justice.
In early 2006, a major scandal erupted when the Minister of the
Interior accused one of the magistrates, Luis Velazquez Àlvaray, of
stealing public funds in the acquisition of a building for the
Court. Àlvaray counterattacked and accused Vice Pres. Rangel, as
well as Interior Minister Jesse Chacón and National Assembly Pres.
Nicolas Maduro, of running a gang of corrupt judges called “The
Dwarves,” specialized in protecting drug traffickers. All of these
allegations came to naught. Àlvaray left the country, and the
bureaucrats he accused remained in their jobs.

Corruption at the National Electoral Council.
The performance of the NEC under the political control of Chavez
has led to widespread distrust among Venezuelans. The decisions of
this body always have been biased in favor of the government, even
during the recent referendum which the government lost by a margin
of more than six points. Negotiations by Chavez with the president
of the NEC led to official figures that showed a much narrower
margin. Reports by international observers from the Organization of
American States (OAS), European Union (EU), and Spanish Parliament
during the electoral events of 2004 and 2005 state that the Council
lacks transparency and that its members should be selected properly
for impartiality.

Particularly grave is the situation of the electoral registry.
It has grown by more than 2,000,000 voters in the last three years,
a statistically improbable figure. Still worse, these voters have
no proper addresses or reliable identities, making them “virtual”
voters that could be used by the government to swing any election
unless there is very rigid monitoring by the opposition. Uruguayan
analyst Adolfo Fabregat found 39,000 voters that were shown to be
older than 100 years of age, and one was listed as being 175. A man
called Jose Gregorio Gonzalez Rodriguez, born Aug. 4, 1962, is
listed 62 times under different identity card numbers, and
therefore is able to vote that many times. Examples like this
number in the thousands and have been documented properly and
presented to the OAS for analysis, so far without result.

High levels of mismanagement at the state-owned
petroleum company, Petroleos de Venezuela. Corruption here
takes many shapes. It includes the naming of six presidents and
boards in seven years, in an effort to control the company
politically. This finally was accomplished by naming the Minister
of Energy and Petroleum president of the company, in violation of
good management practice, since he now supervises himself. As a
result, oil production has declined by some 800,000 barrels per day
during the last decade. In a recent public hearing, Luis Vierma,
the firm’s Vice President for Exploration and Production, admitted
giving an oil well drilling contract for some $20,000,000 to a
company with only three employees and no rigs.

Systemic corruption, meanwhile, takes place when government
bureaucrats and the private sector interact in a permissive
environment where money flows abundantly and without controls.
Examples include:

The emergence of a new, rich, “revolutionary
bourgeoisie” that drives Hummers, sports Cartier and Rolex watches,
and wears Ermenegildo Zegna suits. They buy luxury
apartments in the U.S. and Europe, fly in private jets, and,
salesmen say, always pay in cash. Wilmer Rupert was a minor
associate of an international company a few years ago; today, he is
quite rich, thanks to obtaining a large share of contracts from the
state-owned oil company. Rupert has bought a television station
and, as a present to the government, recently spent $1,600,000 to
acquire two pistols that belonged to Simon Bolivar at auction at
Christie’s.

Private corporations that deal with the government are
owned by government officers. Government officers own
companies that do business with the government, but conceal this
fact by working through private intermediaries. Kenneth Rijock, a
financial analyst, notes that these types of corporations have
sprouted under Chavez. He mentions major agribusiness organizations
such as ProArepa, the main supplier of food for government handout
programs. Rijock also points to a large grain transport group
“rumored to be owned by Chavez’s brother, Adan.” Officers of record
of ProArepa include Ricardo Fernandez Berruecos, whose private jet
recently was detained by the U.S. government at a Florida airport
for not having the proper documentation of ownership. Journalist
Patricia Poleo mentions the case of the brother of Chacón, who made
a $10,000,000 offer to buy INDULAC, a large milk producer, without
the source of the funds being known.

Drug trafficking. Venezuela has become a haven
for Colombian guerrillas who move drugs across the country with
impunity due to the absence of border controls. A report by Andy
Webb-Vidal for Jane’s Intelligence Review in May 2006
reveals that cocaine operations are shifting to Venezuela; he notes
that drug volumes going through the country have skyrocketed during
the last 10 years. Prominent drug traffickers of Colombian origin
live without fear of prosecution in Venezuela.

Chavez obviously has failed to live up to his electoral promises
to end corruption. The record is clear. The Corruption Perception
Index, published by Transparency International, has shown a
progressive deterioration of the ranking of Venezuela, both in
Latin America and the world. The latest index shows Venezuela in
position 138 among 163 countries. This is the worst ranking of all
Latin American nations with the exception of Haiti. Vice Pres.
Jorge Rodríguez, expressing the official position of the
government, claims that Transparency International “was a
discredited institution since it charges a tariff for positioning
countries favorably in the rankings.” Transparency International is
headquartered in Berlin, Germany, and has chapters in more than 100
countries, including Venezuela. It is a highly respected
organization and its corruption rankings are accepted by the
international community as the best source of information on this
global problem.

Meanwhile, the Venezuelan ranking in the Economic Freedom of the
World Index is 126 out of 130 nations, above only the Republic of
Congo, Zimbabwe, and the Democratic Republic of Congo. This ranking
has been declining steadily since Chavez came to power. It has been
established that countries with little economic freedom,
characterized by exchange controls, military influence in
government, and predominance of state-owned enterprises display the
highest levels of corruption. Moreover, the Human Development Index
produced yearly by the United Nations also charts Venezuela in
free-fall. The country has lost 30 places in this index in the last
six years.

Promises vs. reality

Chavez’s record shows a significant gap between his promises to
end corruption and the current reality. Immense amounts of money
belonging to the Venezuelan people have been misused in furthering
an anti-U.S. alliance in the Western Hemisphere and beyond. Five
countries of the region-Mexico, Peru, Argentina, Paraguay, and
Chile-have expelled Chavez’s ambassadors for interfering in the
internal political processes of their countries. Chavez’s policies
have promoted corruption rather than combating it. The
concentration of power in his hands and the lack of institutional
checks and balances have led to a total absence of accountability
and transparency in the government. Although corrupt bureaucrats
have been identified, none have been punished. Not one single
person is in prison in Venezuela for corruption. At most, some have
lost their jobs, while retaining their bounties.

It seems clear that no meaningful victory against corruption can
be won in Venezuela while the Chavez government is in power. Only a
democratic government, fully accountable to the people, and fully
transparent, will be able to minimize this malady. This is why the
Venezuelan lovers of freedom and democracy are in for the fight of
their lives and, thankfully, seem to be making real progress.
Chavez’s pretensions of becoming dictator for life came to an end
on Dec. 2, 2007, when a constitutional reform that would have made
him president for life was defeated. He still is president, but is
starting to look more and more like a paper tiger.

Gustavo Coronel, as president of Agrupacion Pro Calidad de Vida,
was the Venezuelan representative to Transparency International
from 1996-2000. He was a member of the board of directors of
Petroleos de Venezuela from 1976- 79. This article is adapted from
the Cato Institute policy paper “Corruption,
Mismanagement, and Abuse of Power in Hugo Chávez’s Venezuela.”